Financial Risk Manager Part 2
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In a 3-year interest rate swap agreement initiated earlier in the year between HIP Bank and ADB Banking Corporation, ADB Banking Corporation agreed to pay HIP Bank a fixed interest rate of 5% in exchange for receiving a payment based on the 6-month LIBOR plus a spread. However, after the swap was executed, both HIP Bank and ADB Banking Corporation experienced downgrades in their credit ratings, resulting in an increased credit spread. Specifically, HIP Bank's credit spread rose from 36 basis points to 144 basis points, and ADB Banking Corporation's credit spread increased from 114 basis points to 156 basis points. Assuming the LIBOR curve remains constant, which of the following statements is most likely to be true if the same 3-year interest rate swap were to be initiated today?
In a 3-year interest rate swap agreement initiated earlier in the year between HIP Bank and ADB Banking Corporation, ADB Banking Corporation agreed to pay HIP Bank a fixed interest rate of 5% in exchange for receiving a payment based on the 6-month LIBOR plus a spread. However, after the swap was executed, both HIP Bank and ADB Banking Corporation experienced downgrades in their credit ratings, resulting in an increased credit spread. Specifically, HIP Bank's credit spread rose from 36 basis points to 144 basis points, and ADB Banking Corporation's credit spread increased from 114 basis points to 156 basis points. Assuming the LIBOR curve remains constant, which of the following statements is most likely to be true if the same 3-year interest rate swap were to be initiated today?